How is Interest Income from HYSA (1099-INT) Taxed Differently than Brokerage Account Interest (1099-DIV)?

The confusion is understandable! Both types of interest are generally taxable, but they're reported differently depending on the type of account. For your HYSA, the bank reports interest on Form 1099-INT. The "$0 federal income tax withheld" doesn't mean you don't owe taxes - it simply means the bank didn't withhold any taxes in advance. You're still responsible for paying taxes on that $627 interest income when you file your return. For your brokerage account, interest earned on uninvested cash is sometimes reported on Form 1099-DIV under "Interest-related dividends" rather than on a separate 1099-INT. This happens because brokerage firms may invest your idle cash in money market funds, which technically pay dividends rather than interest, though the economic effect is similar. Both types of income are taxable at your ordinary income tax rate. The key difference is just in how they're reported to you and the IRS, not in how much tax you'll ultimately owe.

I went through the exact same confusion last year! I finally figured it out when I started using https://taxr.ai - it automatically detected both types of interest income and explained the difference. Basically, my brokerage was putting my uninvested cash into a money market sweep account, which technically pays dividends not interest, which is why it showed up on my 1099-DIV. The software flagged this for me and explained that I needed to report both. It also showed me where on my 1099-DIV the interest-equivalent income was being reported (it was under "Interest-related dividends" in Box 11). Made the whole process much clearer than when I was trying to sort through my statements manually.

Just wanted to update after trying taxr.ai for my interest income issue. It actually saved me from a potential audit flag! Turns out I had interest income on my 1099-DIV from Fidelity that I completely missed last year because I only looked at my 1099-INT forms. The tool highlighted exactly where on my 1099-DIV the interest-equivalent income was reported (Box 11) and explained that even though it's on a DIV form, it's still treated as interest income. It also caught that one of my money market funds was a tax-exempt municipal fund, so that portion wasn't actually taxable at the federal level - something I would have overpaid on! Definitely worth using if you have multiple accounts with different reporting formats. Learned something new about how brokerages report interest income.

If you're struggling to get answers about your tax forms and considering calling the IRS, save yourself the headache! I spent DAYS trying to get through to someone at the IRS about this exact interest income issue last year. Finally discovered https://claimyr.com and used their service to get a callback from the IRS within 3 hours (instead of waiting on hold for literally hours). You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that interest from cash in brokerage accounts is often reported on 1099-DIV forms in Box 11 as "Interest-related dividends" rather than on a 1099-INT, but it's still taxed the same way. And yes, even though your HYSA shows $0 withholding, you definitely still owe taxes on that income.

Just wanted to follow up on my skeptical comment about Claimyr. I tried it yesterday because I was getting nowhere with the IRS's regular line trying to figure out my interest income reporting issue. I was genuinely shocked when I got a call connecting me to an actual IRS agent about 2 hours after using the service. The agent explained that interest from my brokerage's cash sweep program appears on the 1099-DIV because it's technically coming from a money market fund, not a deposit account. Still taxable as ordinary income, but reported differently than my direct bank interest. Saved me 3+ hours of hold music and frustration. Just needed to share since I was definitely the skeptic before trying it!

Slightly different take here - watch out for tax-exempt interest that might be mixed in with your brokerage reporting! Some money market funds in brokerage accounts invest in municipal securities, and that interest might be federally tax-exempt but still reported on your forms. Check box 11 on your 1099-DIV for "Exempt-interest dividends" as well. I missed this my first year with a brokerage account and overpaid my taxes by reporting it as taxable. Had to file an amendment later.

Anyone else notice their HYSA interest rates dropping this year? I got $531 in interest on my hysa last year (on 1099-INT) but the rates are down by almost a full percent now. Wondering if it's better to move cash to my brokerage sweep account since they're paying similar rates now but with easier access to investment options.